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Hi friends 👋,
Happy Thursday! Today is a really special Not Boring for me. We’re bringing back the Not Boring Investment Memo, and discussing in a company that’s near and dear to me: OZE.
I’ll explain why this deal in particular is special, and do a deep dive on fintech, Africa, and OZE after a word from our sponsor.
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Quick Explainer on the Uniqueness of Our OZE Access
I want to highlight something clearly right up front: my sister founded and runs OZE. Let’s get to it.
Not Boring Investment Memo: OZE
On Monday, I wrote about two Irish brothers who dropped out of MIT and Harvard to launch a US-based fintech company, Stripe. Today, I’m writing about my half-Irish sister who graduated from MIT and Harvard and runs a Ghana-based fintech company, OZE.
In the US, we take accounting software for granted, and banks regularly give loans to small businesses to help them grow. In Africa, where small businesses are the backbone of the economy, most businesses still use paper ledger books to record transactions. That means poor insights, lack of access to credit, and too often, failure.
OZE is bringing African small businesses into the digital era with a combination of mobile record-keeping, invoicing, loans, and soon, payments. They use behavioral tactics to get people to consistently enter data with machine learning to use that data to underwrite loans.
To be sure, building a business in a developing country is high risk. OZE was the first subscription app in Ghana, for example, so not only did they need to educate users on mobile accounting, they needed to educate them on the business model. There was no guarantee that it would work. But high risk can mean high reward. By being first to market, OZE has mouth-watering customer acquisition dynamics and the ability to win bank deals that a company of its size would never win in a more developed market.
Being first to build necessary infrastructure in a rapidly developing country requires extreme patience in the beginning, but if you get the product and the market and the onboarding and all of the little details close enough to right, it starts compounding in multiple ways at once.
That’s where OZE is today.
Because my sister runs OZE, it had to jump an even higher bar than normal. With that in mind, I’m excited to bring this opportunity to Not Boring for five reasons:
Product. OZE combines local market knowledge and an outsider’s design thinking to build an accounting product that customers somehow love in a hard but valuable problem space.
Bank Deal. OZE is completing a technical proof-of-concept with one of Africa's largest banks to digitize their merchant working capital loans. The commercial agreement is a profit-share and in 2019, this bank did over $1.5B in loans to small businesses. In a relatively conservative case, this deal would generate millions in net revenue for OZE. The company is raising this round to support hiring for that deal.
World’s Fastest-Growing Market. West Africa is home to many of the fastest-growing economies in the world. The digital record-keeping opportunity is $960mm in Ghana and $18bn across Africa today, and at current growth rates, will be $60-100bn in a decade.
Huge Investors are Backing Similar Businesses in SE Asia. Sequoia has backed record keeping businesses similar to OZE in India and Indonesia, two markets with similar growth and market characteristics to West Africa, Khatabook and BukuKas.
The Team. The OZE team is a mix of local and US, technical and business, art and science. Meghan is the perfect person to lead it.
The idea for OZE came out of Meghan’s experience working with small businesses while she was in the Peace Corps. Countless hours of manually copying ledgers from paper notebooks into Excel gave her a nemesis, and a goal: kill paper ledgers.
How Small Businesses Run in West Africa and Why That’s a Problem
When I went to Ghana last year, my sister took me to the markets. Markets there are different than markets in the US. Here, each vendor is equipped with a Square reader that handles payment and record keeping automatically. In a Ghanaian market, vendors take payment in cash, and record transactions with pen and paper.
Paper ledgers are a problem for two reasons:
Businesses can’t use their data to make smarter decisions.
You can’t walk into a bank with a pile of handwritten books and get a loan.
Those two factors team up to doom small businesses to continued smallness or failure.
While there aren’t any scaled digital record-keeping companies in Africa, there are digital lenders. But since they don’t own record-keeping, they actually don’t have a good way of knowing who’s serious. As a result, they mainly target consumers instead of small businesses, because consumers need smaller, and therefore less risky, loans. Tala, which has raised over $200 million and is valued at $800 million, typically starts with really small loans of around $20 and then increases loan sizes up to $500 as customers repay progressively larger loans.
Sounds good, but like any system that can be gamed, people game it. There’s a well-known phenomenon, “spinning,” in which people work up the chain, paying back loans of $20, then $40, then $100, and so on, up to the largest loan of $500… and then default and run away with $500 in their pocket. In Kenya, where Tala lends, the Central Bank of Kenya doesn’t allow lenders to blacklist consumers for defaulting loans under a certain amount, so spinners can move to the next app, no worries.
Digital record keeping makes spinning nearly impossible for small businesses. Diligently submitting cash transactions and building credit for a business only to take a loan and run away doesn’t make any sense, particularly when there’s no other app to jump to to rebuild credit and their credit history can’t be accessed until they start repaying.
You need to be able to analyze your data to run a good business and so paper-based ledgers are bad for business. You need to be able to access credit to grow your business, and so paper-based ledgers block growth. As a result, small businesses in Africa are left without necessary information or access to capital they need to be successful.
How OZE is Solving the Problem
OZE kills the paper ledger and replaces it with mobile digital record keeping, helping small businesses in Ghana and Nigeria make smarter decisions, present professionally to their customers, and receive affordable loans to help grow their businesses. By starting with record keeping, OZE is building a proprietary behavioral and financial data source on top of which it’s building machine learning-powered credit models.
So far, it’s working. 97% of customers who have used OZE for at least three quarters are profitable and/or growing, extraordinary results for a market in which most small businesses fail.
There are some startups, like Khatabook and BukuKas, that do record-keeping, and others, like Tala, that do digital lending. OZE is unique in the developing market in doing both. It’s most similar to Square with a Quickbooks integration.
OZE currently makes money in two ways, which reinforce each other:
Subscriptions. OZE is a small business SaaS product that gives customers the ability to track unlimited sales and expenses for free in the app. If they want to send unlimited digital receipts to customers, send payment reminders to customers who bought on credit, download their data, add employee accounts, or access several other features that make OZE more powerful, they need to upgrade to a paid monthly subscription running from ~$2-20 per month.
Unlike Khatabook and BukuKas, which give the record keeping product away for free, OZE’s focus on the app as a revenue generating product in itself gives it a huge advantage in lending.
Loans. OZE provides a modular solution to lenders: they offer lead gen, data, credit risk assessments, and digital tooling. Banks or fintech lenders can pay for any of those features a la carte or together, for a fee or % of total loan value or profits.
OZE’s record keeping product enhances its loan product in three ways:
Building up the data set: 95% of transactions in most African markets, even Nigeria, are still in cash, so the only way to get an accurate picture of performance is to incentivize customers to record cash transactions. OZE’s ability to get customers to record cash transactions is super valuable because so few companies use mobile money, at all or exclusively. A record-keeping system that captures both cash and mobile money transactions gives OZE the most complete data on small businesses.
Using Oze helps businesses perform better: 97% of businesses that have used OZE for at least three quarters last year were growing and/or profitable. Simply, businesses that are growing and/or profitable are more likely to repay loans than unprofitable ones.
Behavioral Data: Consistently entering accurate data (OZE’s ML model can pick up on tell-tale signs that distinguish real data from faked data) provides important behavioral data about a business. For example, are they selling to many different customers, inputting phone numbers for the customers, and sending them receipts? Diligently entering data for months on end is much harder than “spinning” and provides OZE and its bank partners with another layer of proprietary data to use in underwriting loans.
OZE incentivizes business owners who take a loan to use the app during their repayment period with a small rebate for compliance. And if a business owner is active on OZE (more than 10 transactions per month) they are more likely than not to be paying for their subscription. That means that while the bank or fintech is paying OZE for the loan, the small business owner is giving OZE revenue and data that will allow the app to become more powerful to the user and lower risk (and therefore interest rates) for the next loan that the customer takes.
Next up, OZE is adding mobile money payments.
Over the past five years, mobile money in Ghana went from “What’s that?” to the fastest growing mobile money market in the world. To capitalize on that growth, OZE will soon integrate Stripe-backed Paystack to offer payments. Beyond direct fees, handling payments has a host of advantages:
Increase the volume of transactions recorded,
Improve customer experience by automating parts of the accounting,
Create higher quality data for the credit model,
Allow OZE to scrape micro-repayments from the system rather than waiting for the customer to send a payment once per month. This means lower default risk, which translates to a lower cost of capital for OZE’s customers.
Payments make the whole cycle more powerful while also generating revenue for the company. By integrating with Paystack, they avoid building a payments company for each market they go into and avoid the regulation (and hefty central banking deposits that come with it) to register as a PSP.
Once OZE acquires a customer, it has multiple ways to monetize them -- subscriptions, loans, and payments -- increasing their LTV. It has some major advantages on the CAC side as well:
Facebook CAC is currently $0.52 because OZE has some first mover advantages:
Facebook Ads Manager is shitty and slow there, so only the dedicated use it
You need a credit card, which most businesses don’t have
It’s an auction model with few other bidders
Because its product supports economic development in traditionally challenging markets, OZE wins development contracts to acquire customers. It recently won a contract with the UN, which will give it $1 per customer to acquire 10k customers - at a $0.52 CAC, it will actually have a negative $0.48 CAC on these customers.
Cheap customer acquisition and linked subscription, lending, and payments products create OZE’s Flywheel.
The OZE Flywheel is fueled by customers using the product, so it’s a good thing that customers love OZE. A few proof points:
OZE has a Net Promoter Score (NPS) of 74. According to Clearly Rated, the accounting industry average is 23. Apple is typically cited as the gold standard - its NPS is 72.
Some businesses struggling due to COVID had to stop paying their OZE subscription to lower expenses. OZE gave some of them loans, and the first thing they spent on was re-upping OZE. One customer, who makes shoes, took a loan from OZE and made their first three month payments on the day the first month’s payment was due. The owner said:
The flexibility of terms and low interest got me signed on so quick. CABOOM" I received cash within a few days. I sounded like an ambulance when I saw the message - wow wow wow wow - because it obviously doesn’t work like that in my country.”
Love leads to engagement, engagement leads to better results and more data, and better results and more data make OZE customers attractive borrowers.
Banks Like Loans Too
From a small business’ perspective, moving from paper to digital means access to capital. Continued compliance and improving business metrics mean access to cheaper capital. And access to cheaper capital enables growth.
From the banks’ perspective, digital ledgers mean a bigger pool of businesses to which they can lend. In the markets that OZE is targeting, 90+% of businesses are small businesses. With no way to underwrite small business loans, banks are left competing heavily to win corporate clients, compressing rates and profit margins, so the real money for banks is in reaching down market where margins are higher (with the proper tech and underwriting) and there’s less competition.
Banks are woefully unequipped to make small business loans in the year of our Lord 2020, though. OZE’s experience working with several large banks to co-create their lending product is illustrative. During one workshop, they asked the bank to map out the small business loan approval process. It included:
Multiple (multiple!) fax machines
An audit by “PWC or an equivalent firm”... for a business that may be doing $12k per year in revenue!
When they asked how many small businesses could meet that requirement, they were met with silence.
Needless to say, banks are not lending to small businesses. According to the World Bank, there is a $360 billion credit gap in Africa, leaving 20 million businesses without access to much needed loans.
Even fintechs struggle to make small business loans. They can’t “see” cash transactions so they don’t really understand performance. OZE provides the technology, risk assessment, and data infrastructure for digital lenders in a modularized fashion to meet the needs of the diversity of players in the market. Deals with fintechs like Pezesha are as important as traditional banking deals as early proof points of OZE’s ability to enable better underwriting, disbursement, and repayments. They set the stage for the massive opportunity to digitize small business lending at Africa’s largest banks and fastest growing startups.
OZE’s Big New Deal
The reason that we’re here today is that OZE is completing a technical proof-of-concept with one of Africa's largest banks to digitize their merchant working capital loans.
The commercial agreement is a profit-share and in 2019, this bank did over $1.5B in loans to SMEs. If OZE passes the proof of concept, in a relatively conservative case in which...
Loans don’t grow
The credit gap doesn’t close, and
Only 5% of loans go digital,
...this deal would generate millions of dollars per year in net revenue for OZE.
The deal also represents additional upside for OZE:
Potential to digitize this bank’s consumer lending (about 3x the volume of SME loans)
Proof point for other large African banks
Customer acquisition for OZE’s subscription and coming-soon payments product
While this deal is potentially transformative for OZE in the short-term, it’s even more important because it would establish OZE as the leader in digital record-keeping and lending to SMEs in West Africa. And West Africa is an amazing opportunity at the very beginning of its story.
West African Opportunity
One of my new favorite themes to look for is the compounding effect of young users. If you can get into an underserved, high growth target market early, retain and expand with customers, and continue to acquire new low-end customers as they enter the market while also going upmarket to serve larger customers, your growth will dramatically compound over time. OZE takes advantage of something similar: the compounding effects of young markets.
It’s one of the main reasons I love Stripe’s strategy.
At an increasing rate, startups become big companies, and young people become decision makers. While incumbents and other competitors focus upmarket, on the most lucrative opportunity in the present, Stripe focuses on compounding over time.
The same is true for countries. Investors are funding startups in China, India, and Indonesia at an unprecedented rate because they see the opportunity to build core digital infrastructure for a less developed market and ride the market’s growth to massive outcomes.
West Africa is the next Southeast Asia. According to the World Bank, Ghana’s GDP grew by 6.5% in 2019, and has averaged 6.8% over the past decade. It outpaced the United States by nearly 3x, and also beat out fast-growth poster children India and Indonesia.
Following China, which largely leapfrogged personal computers and went direct to mobile, many Africans are skipping computers and doing everything on their phones. Smartphone penetration in Africa is growing at a 10.6% CAGR and will reach 86% of the adult population in 2025. They’re adopting mobile money even faster. Sub-Saharan Africa is the world’s fastest growing mobile money market, growing 39% annually for the past decade.
Today, the digital record-keeping market in Ghana alone is a $960 million opportunity across Records, Credit, and Payments. Across Africa, it’s worth $18 billion.
Over the next five years, the TAM is expected to grow to $60-100 billion. This seems like silly, unrealistic growth, but it’s the result of multiple concurrent expansions: the GDP is growing at 6.5% per year while mobile money grows 39% per year while products like OZE grow the number and success rate of small businesses in Africa. It’s hard to grok that kind of compounding; luckily, we have examples from markets that are a few years ahead.
Comps: Khatabook and BukuKas
The demographics dynamics in West Africa are similar to those in India and Indonesia. All three are large, fast-growing, unbanked or underbanked populations with small-business-centric economies that are rapidly adopting mobile and growing their GDP at ~6% rates. Similar products in those countries provide good comps for OZE.
Khatabook in India and BukuKas in Indonesia both offer digital ledgers to small business owners. Khatabook also serves consumers and facilitates payments, while BukuKas is planning to monetize via lead gen to lenders who will lend off of non-proprietary data.
Both companies offer similar products to OZE but have raised far more money.
In May, Khatabook announced a $60 million Series B led by Eduardo Saverin’s B Capital. It has raised a total of $87 million, from investors including Sequoia India and the subjects of the last two Not Borings, Stripe and Tencent, and is currently valued between $275 and $300 million.
On August 19th, BukuKas announced a $9 million “pre-Series A” round, led by Sequoia India, bringing their total funding to $12 million.
Both companies have far more users than OZE and operate in more mature markets. OZE has similar metrics to BukuKas, but BukuKas has spent more on customer acquisition because it’s competing head-to-head with YC-backed Bukuwarang, whereas OZE does not have a major competitor in their market and is the current market-leader in Ghana.
If Africa continues to grow and the market evolves similarly to SE Asia, I see a similar opportunity for OZE.
After college, I got a job in finance and moved to a 3-bedroom apartment with two friends in New York. Meghan, on the other hand, moved into a hut in the backyard of her host family’s house in Guinea, where she would spend two years working in the Peace Corps focused on Economic Development. According to Forbes, when Meghan was there, Guinea was the world’s worst country for business three years running.
To fix that, while in the Peace Corps, Meghan launched Dare to Innovate, a non-profit focused on helping entrepreneurs start businesses. It’s now the largest accelerator in French-speaking Africa. A few years later, when she told the family that she was launching OZE to help digitize small businesses in West Africa, we thought it was the latest example of Meghan helping others. She corrected us.
“This isn’t a fucking charity. West Africa is the fastest growing economy in the world.”
Meghan’s this weird dichotomy: generous and cut-throat, all wrapped into one.
She started a carnival to raise money for HIV/AIDS awareness in 5th grade, but is about 1,000x less soft/emotional than me.
In college, she studied Finance and Theater.
After the Peace Corps, she went to work for Monitor Doblin, a blend of management and innovation consulting and design thinking.
For grad school, she got her MPA from Harvard’s Kennedy School and her MBA from MIT Sloan, all while flying back and forth to Ghana every break she got.
She joined the Peace Corps and went to West Africa to help; she committed to West Africa and launched OZE because of the massive economic opportunity.
Meghan’s co-founder, Dave Emnett, is the operations wizard at OZE and the best digital marketer in Ghana. Dave and Meghan met through the Peace Corps, while he was stationed in Benin helping a food processing business to get organic certification and export to the US and European markets. They worked together expanding the non-profit Dare to Innovate before spinning out to start OZE.
In addition to Meghan and Dave, OZE’s exec team includes Burkinabe Tech Lead, Aly Sawadogo, who has ten years experience running tech teams in the US and Ghana, and Beninese Data & Analytics Lead, Tite Yokossi, who earned his Ph.D. in Economics from MIT.
OZE has nine more employees in Ghana, across engineering, sales, and BD. I met some of the team when I was in Ghana, and was particularly impressed by Prince Mortagbe, the Senior Customer Success Manager who spent hours and hours in OZE’s early days physically downloading the app onto small business owners’ phones in the markets.
The OZE team is the right mix of local knowledge, technical aptitude, credentials, and design thinking to build a product that both small business owners and Pan African banks love to work with.
What Are the Risks?
Early stage investing comes with major risks, and OZE is no different. As with any early stage investment, the numbers suggest that you should expect any money you put into an early stage startup to go to $0. Here are a few OZE-specific risks:
They may not be able to successfully complete the POC with the Pan-African bank or to leverage that deal into more banking deals.
Adoption of record-keeping may not become widespread in a reasonable timeframe.
Paystack could add record keeping, although cash is hard.
The regulatory landscape can be challenging, unpredictable, and slow.
OZE’s credit risk model may not outperform traditional models when it comes to predicting credit default.
Successful adoption requires both financial and tech education.
Default rates may increase over time as OZE has less of a direct relationship with each borrower.
Opacity in the market makes it difficult to assess bank deal values.
Everything could go right and there still may not be an exit opportunity.
There are certainly risks that neither I nor the OZE team is currently aware of that could sink the business.
OZE is very early in a potentially massive market with parallels to well-funded similar businesses. Being early, and putting in the hard work of getting businesses to consistently enter cash transactions, allows OZE to own more of a business’ financial infrastructure than it would be able to in a more mature, crowded market.
OZE is well-positioned to both accelerate and ride the growth of the African economies that it serves -- today, Ghana and Nigeria, and soon, through a bank partnership, in 33 African countries.
When it’s successful, OZE will do well by doing good, growing the African economy and growing its business with it.
Me Da Ase (Thank You).
Disclaimer: Startup investing is very risky. You should do your own diligence and don’t invest any money you’re not comfortable losing.
One quick note: because of the Labor Day Holiday, I will be sending out next week’s Not Boring on Tuesday instead of Monday.
Thanks for reading, and enjoy the long weekend,